Smaller units are losing value faster: how the property you choose impacts price

If you’re shopping around for a first or next home, the number of bedrooms and dwelling type you choose could play a major role in its price in the current housing market.

Dwellings with a “smaller buyer pool”, such as small houses and one-bedroom units have taken a significant dive in terms of median prices nationally, according to research from Domain.

Domain data shows that the median price for a two-bedroom houses fell 10.5% over the March quarter in Melbourne compared to a 4.5% decline for three-bedroom houses. And it’s a similar story in Sydney, with two-bedroom median house prices falling 5.2% in the March quarter, compared to 2.7% for three-bedroom homes, or 2.9% for four-bedroom homes.

Adelaide and Hobart also recorded similar movements, with two-bedroom houses falling 5.1% in Adelaide and 12.9% in Hobart, compared to three-bedroom house growth of 4.6% and 2.9% respectively.

Median house price change by number of bedrooms

Source: Domain 2022 Q1 House Price Report

For units, Domain data tells a similar story as one-bedroom units recorded smaller growth or greater declines in several capital cities.

Melbourne recorded a quarterly change in median one-bedroom unit prices of -5.9%, meanwhile two-bedroom units fell by a smaller 1.7%, and three-bedroom units remained stable at zero.

Brisbane recorded smaller median unit price growth in one-bedroom units (2.1%), compared to stronger performance for two-bedroom units (5.1%) and three-bedroom units (4.8%).

Sydney was the only capital city that saw greater quarterly loss in median unit prices for two- and three-bedroom units compare to one-bedroom units.

Median unit price change by number of bedrooms

Source: Domain 2022 Q1 House Price Report

Why are smaller homes seeing a price decline?

Following the latest Reserve Bank of Australia-led interest rate hike in May, taking out a home loan will now be more expensive for variable rate home loan customers. And with further hikes forecast over the next two years, paired with high inflation and low wage growth pouring water on a hot housing market, demand for smaller homes may be the first to fall.

In a Sydney Morning Herald article, Domain chief of research and economics Dr Nicola Powell said that buyers become “more selective” in their property search during “softening markets”, predicting that the forecast cooling of the housing marketing Sydney and Melbourne will have a “greater impact on less premium homes”.

“You see a divergence in performance depending on the types of property, quality of property and size of property as well,” Dr Powell said.

“Buyers become more mindful of what they’re purchasing. They don’t want to compromise, particularly not on space. We know they’ve really had a preference for homes with more bedrooms [during the pandemic] because they’ve seen greater price growth, and we’ll probably see that [preference] continue,” she said.

Powell went on to note that smaller homes like one-bedroom units, had “a smaller buyer pool”, and that currently “upsizing buyers” remained the largest market segment.

Climbing the property ladder

If you’re a first home buyer trying to nab a property as the market cools, it may be worth considering if a smaller home, like a one-bedroom unit, may fast-track you to achieving your goal.

Looking for affordable options and starting smaller is one common tip recommended to first home buyers struggling in expensive areas, like Sydney or Melbourne. For some homebuyers, it’s still important to consider rental returns (for investment properties) and the potential for value increase if you plan to sell in the short term. Particularly with further interest rate hikes predicted by all big four banks.

Be sure to compare all factors of the home – not just the asking price - to ensure it suits your financial goals and needs, including public transport access or distance to green spaces and good schools.

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